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I would like to reiterate that this is just sharing of an investment thesis. I don’t promote share and ask anyone to buy. I never do, and I don’t have to. You are welcomed to comment on the subject matter, good or bad.

In my last article, I was sharing a deep value investing strategy and an important theoretical concept in finance, arbitrage, using Insas as example in the link below,

https://klse.i3investor.com/blogs/kcchongnz/216003.jsp

It attracted a lot of comments, mostly, if not all are negative comments, except for a couple of usual die-hard fans of Insas. Thank you very much for all your comments. Here I would like to take the opportunity to provide my view on some of the feedback, and that is all, no more post about Insas.

I use a few investing strategies to invest in a diversified portfolio of stocks, the main strategies are high dividend yield investing strategy, the Magic Formula of buying good stocks (high ROC) at cheap price (high EBIT/EV), deep value investing like Insas and Jobnext, and even growth investing. Each of them has its own advantages and pitfall. I have written each and every one of them in i3investor for the last 6 years.

Why investment bankers don’t buy Insas? That never came into my mind as I do not follow institutional investors and investment bankers to buy stocks, although I know many of them are very well educated and good in their analysis, knowing that they have their own interest and their institutional limitations in mind. They are the chasers of quarterly earnings, maybe the followers of the “Golden Rule”, like most people here. There is nothing wrong about it. Hence, I did not speculate the reason why they are not interested. In any case, I don’t think one can earn extra-ordinary return from investing following the crowd. Hence, I dwell in my own field in investing. I also have written a long article, “Investing along the forgotten and beaten track” about it here,

https://klse.i3investor.com/blogs/kcchongnz/120190.jsp

I did speculate a couple of reasons why they are not interested in the previous post if one really pay attention to read and understand it, that they cannot stomach under-performance for short period of time as they will quickly lose their clients, and Insas can be one which may take long time for its value to be realized, that they may not have the mandate to buy this type of stocks, they look foolish doing so, etc. In anyway, if investment bankers are in, we can’t expect Insas to be traded at more than 70% below its quality net asset value anymore. Oh yeah, one can’t compare quality asset in cash and financial assets to low quality assets such as intangible assets, Shopping mall where shoppers have abandoned them, Receivables which we don’t know how much can be realized, or inventories which may be out-dated, or no one wants to buy such as that of Parkson etc. That is obvious.

As to the comment on if Insas can realize the price of their marked to market securities. It will be foolish to assume that if they sell their cash in bank and money market fund (the bulk of it here), they get a discount for it. Sure, go and check if the cash is genuine or not as it is important. But think about it, why would Insas cheats on the cash balance? A red chip company which wants to give the impression of its high cash level to fool investors buying its stocks?

What about listed securities, mostly in Inari shares? Well, if they have to sell in big volume in the open market, sure the price will drop badly. Yes, a kid also knows as someone said. But what if it is a negotiated block deal? I don’t know as controlled block of shares often is sold at premium too, but rarely in discount. What about the comment that Inari share is overvalued at PE 20, and that it should be PE 10, or even 5? I don’t know also as it was trading at PE 30 not long ago also. There are a number of former investment bankers in this thread, they know better than me. But I don’t know, and that is why I just use the market value of the share now. To me that is the best prediction of its share price according to the random walk theory. Yes, it is theory again. I may be wrong.

Most of the analysis data I use in my investing is the recent past and the present data. I am not good at predicting earnings, cash flows and competitions, especially in 5 years and 10 years in the future. You will be able to make a lot of money if you are very good in doing so. However, there is a wealth of research showing that even most professional analysts had been very bad in making forecast. Few of them even can’t predict the earnings and cash flows in the next couple of years. I am just a part time investor, so I stay away from that. In my growth investing, I do a little forecast in future earnings in a more conservative way and try to find out the intrinsic value of a stock, and if the price is above its intrinsic value, even for a fantastic company, I still won’t buy it.

In Insas’s case which is following a deep asset value investing strategy, I don’t deal with forecast; firstly I honestly don’t know, secondly I don’t need to in this strategy, thirdly if Insas, on top of its deep asset value, also has good future earnings and cash flow, simple logic will tell you it won’t be traded at such big discount of 72% to its asset value, and perhaps the price would have been 72% above its net asset value. Furthermore, I don’t even deal with what its return on capital is which I always do for most of my other type of investment strategy. In deep asset value investing, it is all about what assets it has, what are the quality of assets, and what is the value compared to its price, and most of all, what if something goes wrong, and what is the margin of safety? A 72% MOS is not the same as a 30% MOS. But of course, if you think one should go about forecasting its earnings and cash flows 10 years down the road for every investment strategy, go ahead and do it. But bear in mind, there are many ways of doing things by different people, and many people are very successful following Frank Sinatra in “I did it my way”. I myself am satisfy with my return on investing in the stock market. By the way, this my way. Please don’t follow mine.

Insas invested in several start-ups and small technology companies since many years ago. Most start-ups failed, the same for Insas’s, that is the nature of this type of investments, but if they are successful, the reward would be many folds. One of them is Inari. More important is whether they lose a lot of money in those failed ventures and I don’t think it is the case.

Anyway, let us come back to speculate, read my lips, it is “speculate”, on how the deep asset value of Insas could be unlocked.

How value of Insas could be unlocked?

Many investors found frustrating investing in deep asset value stocks with the persistence of undervaluation for a long time. Most investors are not patient enough and would just give up and walk away, while a few diehard value investors remain patient to wait for its value to be unlocked.

What gives a diehard value investor confidence that value will be unlocked so that he can realize the profit expected from his investment? There are different kinds of value stocks, and the precise answer is different. But the answer lies in one word: catalysts.

A catalyst for a stock is a revelation or event that propels the price of an undervalued stock dramatically. It can be anything: a privatization, a spin-off, an earnings report, a positive analyst report or earnings revision, a new product announcement, announcements of a special dividend, stock buyback, an offer to buy a company or merge, a management change, institutions start realizing its value and invest in it, a move by an activist investor, etc.

Below are some speculations on how the value of Insas could be unlocked.

Management can increase the dividend payment annually, or declaration of special dividend, stock dividend, or carries out share buyback, which it can easily do so with the cash and cash equivalent it possesses. Many investors do look for dividend as a recurring income in their investments. A yield matching the fixed deposit rate will certainly great. Dividend distribution also gives a positive signal to investors. It is a positive action to maximising shareholder value. In the most recent year, Insas did increase its dividend to 2 sen.

The presence of an activist investor, or a group of investors with deep pocket could use his/their own cash or carry out a risk arbitrage, if possible, to acquire most of the outstanding shares from the market and go for a General Offer and privatizes the company. All they need is RM530m which has been discussed in my previous post. If that happens, all shareholders will benefit as the share price would go up due to the fight for control, or a GO at a fair price. However, a hostile bidder typically encounters many difficulties when engaging in a hostile takeover. Corporate boards usually have mechanisms or a wide range of defences already in place to resist it. These include poison pill, Golden parachute, greenmail, Pac-man, or the use of a White knight.

Insas has been investing in a number of start-ups and new companies, and the only one which is successful is Inari, and the rest are mostly loss making, although the amount of capitals involved are small ad negligible. Who knows if they strike another gold mine later like that of Inari?

Insas could also carry out a restructuring exercise such as selling off its business with losses or low profitability such as the car rental, luxurious goods segment etc which are hampering the growth of the whole company. This will also act as a catalyst. With the proceeds of the sale of some of these under-performing assets, perhaps the company can increase its dividend payment. Better still with the proceeds, acquire some companies with better growth and profitability prospect.

Other speculations are what if the analysts and investment bankers change their mind and they start to write about Insas and institutional investors realize there is indeed huge value in Insas and start buying them? Or a foreign institutional investor starts to accumulate the shares and Thong got panic? What if Inari got its 5G or many other contracts and its business flies to sky, and investors give it a PE of 30 like what it has given to it recently?

An investor may be able to identify a potential catalyst that can unlock the value. But the timing is still not known. A typical horizon can be of two-three years but can sometimes be as high as five years from now. Assuming an investor of Insas is very confident that the share price of Insas could rise to RM2.00, 40% below its net asset value in the next few years due to its grossly undervaluation, if the holding period is one year, this will mean a 150% compounded annual return (CAR); for two years, it will mean 58% CAR, 36% for three years, 26% for four years, and 20% for five years. These CAR are considered as very good as compared to the return of the broad KLCI of CAR of about 6%. What if it takes 10 years? The CAR is still good at 10%. Note the above assumes Insas does not make a sen for the future from now and its balance sheet stays the same, although for the past 10 years, it has grown its book value by 9% a year compounded.

What gives comfort and holding power to the value investor is that he knows what he is waiting for and how long the wait might be.

But for those who are not comfortable with this type of stock, and most of you are, just avoid it. You will be happier, and happiness is what you should seek for in life.

What we discuss here is all speculation, maybe for once we follow what this chap says here,